How the Rate of Defaults and Forbearance Could Impact the Housing Market Once Foreclosure Moratoriums are Lifted

At the onset of the economic disruptions caused by the COVID pandemic, many homeowners were immediately concerned about being able to pay their mortgages, and understandably so. To assist in this challenging time, two protection plans were put into place to help support those in need.

First, there was a pause placed on initiating foreclosures for government-backed loans, which started on March 18, 2020 and ended on December 31, 2020.

Second, homeowners were able to obtain mortgage forbearance through the CARES Act for up to 180 days, followed by a potential extension for up to another 180 days. Forbearance plans are typically used by borrowers who experience a temporary hardship such as a sudden loss of employment, a reduction in income, or a natural disaster.

These plans help households manage their finances by providing short-term liquidity to mortgage borrowers, temporarily removing the obligation to make their monthly mortgage payment. This action helps preserve homeownership; without this financial relief, many households would have been forced to sell their homes or would have defaulted on their mortgages, which, in turn, could have depressed the housing market, leading to further defaults in a vicious cycle.

According to a 2020 report from mortgage monitor Black Knight, Inc., 6.48 million households have entered a forbearance plan as a result of financial concerns brought on by the COVID-19 pandemic. Unlike during the housing crash of 2006-2008, where many felt homeowners should be forced to pay their mortgages despite the economic hardships they were experiencing, the 2020 economic crisis was managed differently, with more empathy for the challenges that many households were facing.

Now, however, there seems to be some concern that the 2020 economic downturn will lead to a foreclosure crisis caused by an onslaught of homeowners who are not be able to make up the back payments once their forbearance plans expire. Some analysts speculate that if a wave of foreclosures could be the result, that could lead to another crash in home values, as was seen a decade ago.

So the big question is, what happens when forbearance programs expire?

Since no one wants to experience a repeat of 2008’s surge of foreclosures again, the banks and the government are keen to find alternate solutions to help homeowners pay back the money owed over an extended period of time. Instead of putting large numbers of foreclosures on their books, many banks will negotiate a modification plan with the borrower, which will enable households to maintain ownership of the home.

And though there may appear to be similarities between today’s situation and the 2006-2008 housing crisis, one of the main differences is that many homeowners have tremendous amounts of equity in their homes. That equity will enable them to sell their houses and walk away with cash instead of going through foreclosure.

Don Layton, Senior Industry Fellow at the Joint Center for Housing Studies of Harvard University, said,

“With a greater cushion of equity, troubled homeowners have dramatically improved options: a greater ability to access funding (e.g. home equity lines) to keep paying monthly expenses until family finances might recover, improved ability to qualify for and support a loan modification, and, if push comes to shove, the ability to sell the home and monetize their increased net worth while reducing monthly payment obligations. So, what should lenders and servicers expect: a large number of foreclosures or only a modest increase? I believe the latter.”

With today’s positive equity situation, many homeowners will be able to use a loan modification or refinance to stay in their homes. If not, some will go to foreclosure, but most will be able to sell and walk away with their equity, or refinance or modify and tack whatever they owe to the back end of their mortgages.

Will there be foreclosures coming to the market? Yes. There are hundreds of thousands of foreclosures in this country each year. People experience economic hardships, and in some cases, are not able to meet their mortgage obligations. If homeowners can’t sell or refinance, there could be a spike in foreclosures and the supply of homes on the market would increase sharply, pushing down prices.

If we do experience a higher foreclosure rate from those in forbearance, most experts believe the current housing market will easily absorb the excess inventory.

Call RESource Atlanta:
If you are ready to sell your home in Atlanta or Georgia, reach out to RESource Atlanta to talk about a fair, cash offer on your home: https://www.resourceatl.com or 404-620-3110.

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